Johnson Control Capital Investment - Essay Example

Therefore, the company possess huge amount of investment in foreign markets foreign business operations. Theoretically, some traditional and efficient methods are used to evaluate capital investment in domestic as well as emerging foreign markets by businesses. But, capital investment is highly risk associated strategic business activity and the company needs to focus beyond the traditional methods of evaluating capital investments like net present value, internal rate of return, payback period etc.

Emerging financial businesses like investment banking and financial research companies offers flawless capital investment solutions to many leading multinational organizations and they follow several advanced methodologies for evaluating proposed capital investment practices by the MNCs especially in emerging markets. The main objective to use beyond the traditional methods is to reduce future risk i.e. these methods helps to identify the maximum extent of risk possibilities and provide alternative solution to reduce the possible risk in substantial extent.

One of the efficient methodologies for evaluating capital investment is Salomon-Smith-Barney Model. This methodology is widespread and efficient method used by leading investment banks to evaluate capital investments especially in the emerging markets for reducing risk of investment. This is one of the most recent developed methodologies for international capital investment and it was developed in 2002 by Zenner and Akaydin for leading US investment bank Salomon Smith Barney (Anson, 2011, p.488).

This model is risk adjusted and modified extension of G-CAPM approach of capital valuation. In this methodology, different global factors and are considered with a high importance and regional factors are recommended as useless due to market inefficiency. This model mainly focuses on how risk possible risk can be identified in maximum extent and how it can be minimized. As this methodology is modified extension of G-CAPM approach, therefore, it has focused on key shortcomings of the approach.

Having a main objective to reduce risk of foreign investment especially in emerging economy perspective, this methodology has focused on a key fact that emerging markets are not totally harbor specific and integrated restraint and complications which can justify a risk premium. The developer of this methodology added an idiosyncratic risk premium into the G-CAPM approach and extended that approach in a new form with high capability of risk indication and reduction. This methodology has adjusted the country risk premium by the overall risk level of a specific capital investment.

Country risk premium is generally referred by many capital investment models as it is unadjusted risk political premium of the target country. This is qualitative measure which might not be real valued and incorporated in a valuation model. But this methodology use sovereign bonds yield spread in place of political risk premium which is based on high approximation and highly overestimates required rate return from the capital investment in foreign markets. Thus, this methodology can adjust the most debated country risk premium that can be depending on cash flow from highly risky projects or investments and different individual risk characteristics of specific projects with full premium.

Answer 2 Inflation has significant impact on capital investment. Johnson Control has substantial investment in one of the leading Asian emerging